Tick & Tie Finance Blog

How To Stop the ($$) Bleeding in the Payments, Remittance, and Transfer Industries

February 14, 2020

The payments industry is growing and innovating rapidly. In order to keep the small margins in-house on the millions of transactions processed, your reconciliation approach needs to innovate too.

The payments industry is experiencing tremendous upheaval and growth. Fintech unicorns like Remitly, Stripe, TransferWise, Affirm, and Venmo are changing the way businesses get paid and people swap money. Along with this innovation comes an age-old control challenge – reconciling accounts. If you are processing hundreds of thousands of transactions per day, between multiple systems - traditional approaches to reconciliation are no match to the innovation happening in the industry right now.

The Most Complex Industry

Payment, remittance, and transfer companies operate in what is arguably the most complex business environment of all industries.  Cross-border in nature, spanning multiple regulatory jurisdictions, serving heterogenous markets is just the start.  Further compounded by fierce competition, access to capital, brand trust, and thin margins where pennies matter.  You can add micro-lenders and bank alternatives to this list as well, anyone processing massive amounts of transactions daily has these challenges.

Their Competitive Advantage (Secret Sauce)

The basic nature of payment, remittance, and transfer companies is to disburse recipient monies and collect sender funds, often through bank or other intermediaries.  Each company stakes out its own unique identity – often through a distinctive combination of brand, service, rates, partner relationships, and technology.

At the core of almost all these companies are their own custom systems, both customer-facing and internal, that initiate transactions and manage the flow of funds.  In short, these custom systems are a critical competitive advantage because the company has figured out a unique manner to interact with customers and process their wishes.

The Bleeding – aka “Leaking”

The sheer complexity of the process means hand-off points along the customer system transaction process flow create huge risks.  Delays in transfers or settlement become a customer satisfaction and reputation issue.  Incomplete or delayed steps risk leakage or bleeding which can either consume cash or at a minimum tie-up cash.  Margins are thin and these issues can kill a company.

Stop the Bleeding

The most important control to identify leakage or delays is reconciliation.  It will never be a competitive advantage per se, but rather a basic, arduous, and tedious task, yet critical to protect your business.  Critical enough that companies recognize the need to throw humans or technology at the problem and through reconciliations, identify exceptions quickly and resolve them promptly.  Frequently, exceptions identified through reconciliations will highlight issues both upstream and downstream in the data pipeline that require fixes to stop recurring errors.

Integration is NOT Reconciliation

We run across a surprising number of companies that fail to accomplish reconciliations between systems under the belief that, “…we have an integration with our (fill-in-the-blank institution)”.  Integration is not reconciliation.  Integration merely indicates data is conveyed from one system to another system in an automated fashion.  Reconciliation is a rigorous comparison of records in one system to records in another system to identify all discrepancies.  Integrations sometimes include summary electronic metrics or confirmations which indicate if at a summary level that what was received is what was sent.  Batch transfer metrics give zero assurance that respective system records are complete or accurate.  Reconciliation is the ultimate arbiter for comparing system records and ensuring full assurance.

Why Reconciliations Are Complex

As arduous, tedious, and critical are reconciliations, they are also complex and thus difficult to complete because the inherent data complexity of the payments, remittance, and transfer industry operating environment.

A short list of the data complexities includes:

  • Disparate system data schemas between internal and 3rd party system
  • Source system time cut-offs, especially near non-UTC time-zone boundaries
  • Mix of data formats
  • Inconsistent data (wrong or inconsistent values)
  • Missing dataMixture of transaction ratios (e.g. 1 x 1; M x 1; M x N)
  • Bank data latencies (i.e. not all transactions processed in accordance with their own standards)
  • Multi-use data fields (cramming text, numbers, and data into a single field)
  • High volume (scale)
  • Time sensitivity (exceptions need to be surfaced immediately – e.g. funding decisions)

All of the above, plus the sheer speed of the operating environment demand daily reconciliation.

Four Options to Stop the Bleeding through Better Reconciliations

Companies have four choices to meet their reconciliation requirements:

Option 1: Humans and Excel – This is where all companies start (and sometimes stay).  Ironically, while this is most common approach, it is also the most error-prone, slowest, expensive, and least effective.  However, it feels familiar, thereby many companies accept the higher risk for the comfort of the status quo.

Option 2: Commercial Rules-Based Systems – These first-generation technology systems were developed ~20 years ago and began to solve many of the problems present in Option 1.  Match performance is generally mediocre (60-75% is common), but still reduce human effort and improve controls.  Both great improvements.  One downside is implementation is extensive and expensive.  These systems are also less flexible to changing business needs, necessitating hiring or training technical administrative personnel.  Rules-based systems are the current standard by which alternatives are evaluated.

Option 3: Do-it-Yourself (DIY) Custom Applications – The DIY solution uses the same rules-based approach as commercial systems but are internally developed and supported.  DIY gains the same benefits of reducing human effort and improving controls as commercial systems plus can incrementally improve match performance for some use cases unique to the company.  The downside is the huge time and cost to develop and maintain yet another custom system.  Diverting software engineers to build a custom application that adds zero competitive advantage is a questionable use of precious talent.

Options 4: New AI-Powered Systems – Artificial Intelligence technology has finally arrived and is starting to solve corporate back office processes, including reconciliations.  AI solutions, such as Sigma IQ, are particularly well suited to the nasty complex world of payments, remittance, and transfer reconciliations.  Higher match performance (sometimes as much as 30-35 points higher) can be achieved at lower cost while still improving controls and reducing human effort even further, including lower on-going maintenance.  Implementation risk can be far lower since implementation of AI technology can often be accomplished in days and with zero or nominal costs versus months and many $$$$.  The downside to AI is as a newer technology, AI solutions are not as fully featured.  Companies interested in AI should have an early-adopter mindset knowing that main reconciliation functions for matching and exception identification are strong and these solutions will become more fully featured over time.

How to Mitigate Risks When Automating a Matching Reconciliation Problem

When selecting or deciding upon a system change, we face three primary risks:

Do Nothing Risk – Staying with the current method has risks.  For growing companies, the risk is whether the current manual process can scale at the rate and quality that growth demands.  Can you hire, train, and retain people fast enough and control spreadsheet proliferation and inherent errors?  For companies not growing, is the leakage, errors, and human cost eroding already thin margins?

Implementation Risk – Two risks in one.  The first risk is the company will not learn whether the solution performs as promised until after implementation.  The second risk is time and cost.  Even if the solution delivers as promised, but the implementation cost and time far exceeds estimates, ROI is diminished and the extended disruption to staff is damaging.  Minimizing implementation time and cost is critical to mitigating this risk.

Decision Risk – Does the software do what I need?  What if it does not work?   The way to address this risk is through scope, cost, and speed.  Avoid implementation time and cost if possible.  Accomplish a demonstration using your own data for a representative reconciliation if possible.  Contract a small scope initially that allows you to expand.  

What’s the Safest (lowest risk) Choice?

The demands of the payment, remittance, and transfer industry require reconciliation technology keep up with the innovation you are bringing to market. With a little discretion and thought, reconciliations can be one of the lowest risk processes to automate.  One reason is while there may be upstream or downstream actions, the matching reconciliation activity itself is discrete and can be isolated.  While you can replace your whole environment at once, you don’t have to.  You can deploy a limited number of use cases (as little as one) run in parallel if needed, then expand.

If you are staring rapid growth in the face with a high number of transactions being processed – you have to evolve your reconciliation approach with the most accurate technology at the lowest possible risk. Staying with the status quo and bleeding cash with outdated systems that don’t innovate with you, may be the riskiest decision of all.

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